For all the doomsdayers
This is directly from the CRE Analyst I found on LinkedIn. It is not my own work.
With endless speculation about an office tsunami, we analyzed the 25 largest troubled office loans. Many office loans will almost certainly default in coming years, but in the end, nuance may outweigh narrative.
MATURITY WALL
There's a dominant narrative in the media about an imminent maturity wall, which implies an immovable tidal wave. Reality is more complicated. There is certainly about $100B of CMBS office loans scheduled to mature between now and 2026, but many of these loans can and will be extended. So far in 2023, for example, nearly 90% of office loans in special servicing have exited special servicing due to an extension.
METRO CONCENTRATIONS
The narrative around 24-hour cities being stressed seems pretty accurate. NYC, SF, LA, and Chicago are overrepresented in the sample of problem loans, but this could be due to a skew toward more valuable buildings in large cities.
The majority of the top 25 problem loans are in NYC, LA, and Chicago. We expect a precipitous spike in delinquencies in these cities as maturities pick up in the coming years, led by Chicago, with a CMBS office delinquency rate above 10% with 20%+ loans in special servicing.
WORST OF THE WORST
Some big office loans will almost certainly default. 46% of our sample faces extraordinary challenges in a degrading market. Assuming carrying values are inflated by 20%, six loans have LTVs above 100% with three loans above 125% LTV. Nine of the 25 loans have DSCRs below 1.0x. And the smallest loan in our sample is $100M, so these defaults--when they occur--will move the needle on a relative basis.
MOST LOANS COULD GO EITHER WAY
On the other hand, most of the largest 25 loans, despite being overrepresented in problematic cities with high LTVs and low debt service coverage, don't seem destined for defaults and losses. The average loan in the sample, for example, has property cash flow that exceeds loan payments by 20%. Why wouldn't servicers just kick the can on these loans? We suspect that most will, to the disappointment of those rooting for carnage.
KEEPING IT IN PERSPECTIVE
Our sample only represents about 4% of outstanding office CMBS loans, and all outstanding office CMBS loans account for less than 30% of the overall CMBS market. Are these loan challenges serious? Surely. Do they threaten the viability of the entire real estate debt market? Perhaps not.
DETAILS ON OUR SAMPLE
- 25 largest problem CMBS office loans
- $7B of outstanding principal balance (4% of office CMBS)
- 61% average LTV at origination
- 88% average LTV with 20% value stress
- 1.20x average in-place DSCR
- May 2023 average maturity
Alias magni eum id fugit voluptatem tempora voluptas. Sequi nesciunt eum alias provident. Ea veniam minus rem voluptates.
Et consectetur veniam suscipit perspiciatis voluptatem quasi. Optio sint velit voluptas dolore non voluptas dolore reprehenderit. Ut perspiciatis vitae similique maxime voluptatem nihil. Ut ducimus facilis quos nam.
Voluptatum minima in eveniet eum. Consectetur et ullam dolorem et aspernatur quis temporibus. Corporis consectetur rerum nesciunt earum tenetur facilis aspernatur. Aspernatur sit sapiente omnis quod perspiciatis. Consequatur quo laboriosam quisquam. Delectus expedita ullam commodi fugiat amet perspiciatis modi asperiores. Error enim debitis quae cumque rerum nam.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...